Sweeping cash changes for corporate treasurers post-Cyprus

By: Rebecca BracePublished on: Friday, May 3, 2013

Sweeping cash from one jurisdiction to another is a fashionable cash-management strategy for multinational corporations, while deposit haircuts and capital control fears post-Cyprus, plus more general banking stability fears, heap on counterparty risk, principally at bank level.

Companies undertake cash sweeping  the process where
corporate treasurers transfer a given portion of their cash
balances into another deposit account or alternative
investment conduit at the close of each business day  for
a number of reasons. By pooling balances into a single account
they can reduce interest costs or increase interest income. It
is also a way of moving cash from high risk countries to low
risk countries.

Bas Rebel, senior director treasury advisory at PwC, notes
that sweeping continues to be a hot topic for companies.
With banks still reluctant to provide credit lines and,
if they do, at a premium margin,
sweeping is a way to reduce dependency on bank
credit, he says.

In light of recent eurozone developments 
most notably the introduction of a deposit tax in Cyprus on
balances over 100,000  it might be expected
that companies would take the opportunity to consider whether a
similar tax could be introduced elsewhere. As such, companies
might reasonably decide to adjust their sweeping activities
accordingly in order to pull money out of bank deposits in
countries which are perceived to be weak, says a senior
industry commentator.

With cash becoming ever more concentrated in high quality
jurisdictions in Europe, and with ever more cash chasing a
restricted number of issuers, a significant migration of cash
could put further pressure on yields at the short end, he
adds.

But evidence suggests that this has not been the case
following the Cyprus deposit tax. Rebel says that he is not
seeing any particular trend in the countries in which companies
concentrate their cash. Typically funds are concentrated
in the country of its headquarter and/or in the country of the
headquarter of its prime bank, he adds.

Andrew Reid, co-head of cash management corporates EMEA at
Deutsche Bank, draws a distinction between companies
operating balances and their surplus cash balances, noting that
there has been little change in the way in which surplus cash
is managed in response to the Cyprus situation. He does,
however, say that Deutsche has seen an increase in operational
balances held in Germany in the last six to 12 months 
and suggests that companies are focusing on counterparty risk
at a bank level, rather than a country level.

Companies are unlikely to be complacent about the security
of their cash  but following the wake-up call they
experienced in 2008, and the challenging conditions that have
persisted ever since, many have already extensively revisited
their liquidity management strategies.

Some stepped up their sweeping activities then in order to
move cash out of certain countries, while others spread their
deposits across more banks to diversify the risks. Companies
also began adopting more sophisticated risk monitoring
practices, such as looking at CDS spreads as well as credit
ratings when measuring bank risk. Many reduced counterparty
limits restricting the amount that could be deposited with any
particular bank.

Having put all these measures in place, many companies may
feel that their
liquidity management practices are now fit for purpose
 and that the developments in Cyprus do not require them
to do anything differently. Thats not to say that
companies are not
reacting to the events of Cyprus, however. Reid says that
companies are engaging in a more active dialogue around the
subject of contingency planning, which has been on the radar of
many corporations since 2009. Companies started to look
at everything from their bank partner model to their technology
platforms and liquidity management operations, he
says.

A survey published by PwC in 2012 found that in response to
the euro crisis, over 60% of respondents were doing more
to understand and identify the related risks and ensure that
[they] have contingency plans in place. The survey also
reported that more than a fifth had changed their approach
towards managing their exposures and related risks, and were
taking a view on the direction that currencies might take
or how counterparties might fare as a result of the crisis in
Europe and beyond.

Many companies in Europe and beyond have put in place
sophisticated contingency plans to cover outcomes up to and
including a break-up of the euro. The arrival of the deposit
tax in Cyprus has introduced another risk which many had not
considered: the prolonged closure of a particular
countrys banking system, combined with uncertainty about
whether and when that banking system would be reopened. As
such, companies are now beginning to factor such an outcome
into their contingency planning.

Reid says that companies are beginning to look into specific
contingency measures on a tactical basis, such as distributing
prepaid cards attached to offshore accounts, in order to
support local employees if they cannot withdraw cash from ATMs.
Companies are looking for a break box in case of
emergency type of provision, he adds. So the
focus is more on tactical and local solutions, as opposed to
macro and strategic changes such as changing the companys
sweeping structures.

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